BY YOUNGHWA LEE, ZOONKY LEE, AND KAI R.T.

LARSEN

COPING WITH INTERNET CHANNEL CONFLICT

If you do not sell your products directly over the Internet, people will go to your competitors who do, while if you do sell your products directly, your distributors and dealers will desert you and only carry products from manufacturers who do not compete with them. Manufacturers Dilemma [10]

s e-business grows at an incredible speed and consumers widely adopt the Internet in their daily life, manufacturers may have an unprecedented opportunity to develop new marketing and sales channels [6]. Using Internet channels, manufacturers can sell their products directly to their customers, bypassing traditional intermediaries such as distributors, resellers, dealers, and retailers. Additionally, if used properly, Internet channels enable manufacturers to communicate directly with their customers [2], provide consistent purchasing experiences [6], gather richer and more valuable customer information, reduce advertising costs, and create a new market, while also providing competitive services and pricing for consumers.
As manufacturers change their business strategy toward direct online sales, however, the relationship between manufacturers and intermediaries can deteriorate [1]. This is called Internet channel conflict, a conflict that occurs when Internet and traditional bricks-and-mortar channels destructively compete against each other when selling to the same markets. The prior balance of the power structure between the channel members may break down, increasing the risk of financial losses, lawsuits, protective legislation, trust destruction, and market shrinkage [3, 5]. Intermediaries

Illustration By Robert Neubecker

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CONFLICT OCCURS WHEN PARTIES DISAGREE OVER

SUBSTANTIVE ISSUES OR WHEN EMOTIONAL ANTAGONISM CREATES FRICTION BETWEEN PARTIES. CONFLICT THAT IS DETRIMENTAL MUST BE REDUCED OR ELIMINATED.
that fear the negative effects of disintermediation may fight back against manufacturers. For instance, Wal-Mart and Home Depot warned Black & Decker that they would take its products off their shelves should Black & Decker start selling its products through the Internet. Just one month after it started selling guitars online at a 10% discount, Gibson Musical Instruments backed away from its disintermediation efforts due to strong resistance from intermediaries. Confronted with dealer complaints, Ford executives recently agreed to discontinue direct online car sales at a future date. According to a recent survey of the home furniture industry, 66% of manufacturers said Internet channel conflict is the biggest obstacle to their online sales. Because the intensity and frequency of channel conflicts continue to increase, channel conflict management is an urgent issue in the e-business era. Since Internet channel conflict has not received proportionate focus from researchers, stakeholders are at a loss, since they do not have the know-how to cope with their Internet channel conflicts. In this article, we provide a groundbreaking strategic framework, and suggest practical guidelines for Internet channel conflict management. In general, conflict occurs when parties disagree over substantive issues or when emotional Table 1. Internet antagonism creates channel conflict friction between measurement.
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INTEGRATION TYPE
a) My company has investigated or will investigate ICC issues with its ICI to find a solution acceptable to us. b) My company has integrated or will investigate its ICC management strategy with its ICI to come up with a decision jointly. c) My company would work with its ICI to find solutions to Internet channel related problems which satisfy both parties expectations. d) My company would exchange accurate information with its ICI to solve ICC problems together. e) My company would try to bring all the concerns related to ICC -related issues out in the open so that the issues can be resolved as the best possible way. f) My company would collaborate with its ICI to come up with ICC management decisions acceptable to both parties. g) My company would try to work with its ICI for a proper understanding of ICC problems.

Strongly Disagree

Strongly Agree

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AVOIDING TYPE
a) My company would attempt to avoid being "put on the spot" and try to keep its ICC with its ICI to itself. b) My company would usually avoid open discussion of its differences related to ICC management issues with its ICI. c) My company would try to stay away from disagreement regarding ICC management issues with its ICI. d) My company would avoid encounters related to ICC management issues with its ICI. e) My company would try to keep its disagreement regarding channel management issues with its ICI to itself in order to avoid developing an uncooperative relationship. f) My company would try to avoid unpleasant exchanges (or relationships) with its ICI.

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1........2........3........4........5........6........7

DOMINATING TYPE
a) My company would use its influence over its ICI to get its channel conflict management ideas accepted. b) My company would use its authority over its ICI to make a channel management decision in its favor. c) My company uses its channel-related expertise for its ICI to make a channel management decision in its favor. d) My company is generally firm in pursuing its side of channel management issues comparing to its ICI. e) My company sometimes uses its channel-related power to win a competitive channel situation with its ICI.

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OBLIGING TYPE
a) My company would in general try to satisfy the needs regarding the channel issues of its ICI. b) My company would accommodate the wishes regarding the channel issues of its ICI. c) My company would give in to the wishes regarding the channel issues of its ICI. d) My company would allow concessions regarding the channel issues to its ICI. e) My company would go along with the suggestions regarding the channel issues of its ICI f) My company would try to satisfy the expectations regarding the channel issues of its ICI.

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COMPROMISING TYPE
a) My company would try to find a middle course to resolve an impasse regarding ICC management with its ICI. b) My company would propose a middle ground for breaking deadlocks regarding its ICC management with its ICI. c) My company would negotiate with its ICI so a compromise can be reached regarding its ICC management. d) My company would use "give an take" so a compromise can be made regarding its ICC management with its ICI.

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parties. Conflict that is detrimental to an organiza- channel decisions answer the ICCM questions, each tion must be reduced or eliminated. To this end, organization can identify its predominant Internet researchers have developed several conflict manage- channel conflict management style through averaging ment strategies. One major effort applies the concept all scores and performing basic statistical calculations.1 of concern to the arena of conflict management. Indi- If two or three styles are found to have similarly high viduals concerns are defined as their needs, desires, scores, a focus group study may be used to select formal objectives, and standards of behavior. which is most appropriate. Recently, Rahim developed a general model [7] of Stage II. Searching for conflict management that Concern for Self Other Success Cases integrates previous efforts; it LOW HIGH After identifying a companys consists of two concern Obliging Integrating channel conflict management dimensions (self and others) HIGH style, the next step is to get more and five specific strategies I II V detailed information based on (obliging, integrating, avoid- Concern for Compromising Others the experiences of other compaing, dominating, and comIII IV LOW nies. It is important to examine promising), as illustrated in Avoiding Dominating existing success stories in InterFigure 1. net channel conflict manageAs a practical approach to Figure 1. The conflict ment. Success means Internet channel conflict has developing the best Internet management model. been fully or partially resolved by applying a specific conflict management strategy for a company, we suggest a four-stage approach, conflict management strategy. Such stories may be found in e-business magazines, the news media, and which we describe in detail here. some practitioner-oriented journals, as well as on Stage I. Identifying Web sites such as digitalenterprise.org/channels/ an Organizations Internet Channel channel.html. We searched for success stories using Conflict Management Environment Internet search engines such as Lexis-Nexis, ABIIn order to select an appropriInforms, Prospect, ate Internet channel conflict and Google, with the Strategy Company URL management strategy, a com- Market keywords channel conXerox Corp. http://www.xerox.com http://www.ti.com pany must identify its channel Differentiation Texas Instruments flict, Internet channel, http://www.sega.com Strategy Sega http://www.tenneco-automotive.com Tenneco Automotive Inc. conflict management envihybrid channel, and ronment. We suggest this Product conflict management, http://www.kj.com Kendall-Jackson http://www.acer.com environment can be measured Differentiation Acer Group and found 20 success http://www.gap.com Gap Inc. by adopting and modifying Strategy cases as shown in Table Gibson Musical Instruments http://www.gibson.com version II of Rahim Organiza2.2 http://www.us.levi.com Intermediary Levi Strauss & Co. After analyzing the tional Conflict Inventory Support http://www.heb.com H.E. Butt Grocery Co http://www.wesandwilly.com Strategy Wes & Willy cases, we identified (ROCI-II), a successfully http://www.colgate.com Colgate-Palmolive Co. five channel conflict applied instrument designed Estee Lauder Companies Inc. http://www.elcompanies.com management strateto identify an individuals or Conflict http://www.gm.com Avoidance General Motors http://www.3m.com 3M gies (see Figure 2): an organizations conflict Strategy intermediary support management style [8] (see Channel http://www.dell.com Dell Computer Corp. http://www.gateway.com Gateway Inc. strategy, differentiaTable 1). Given its successful Absorption http://www.nike.com Strategy Nike tion strategy, conflict application in diversified indihttp://www.3m.com 3M avoidance strategy, vidual and organizational Information http://www.vfc.com Sharing Strategy VF Corp. channel absorption behaviors, this measurement http://www.wesandwilly.com strategy, and comproscheme may be adapted to Profit Sharing Wes & Willy http://www.5.compaq.com Strategy Compaq Computer mising strategy. In measure an organizations Table 2. Internet channel Figure 3 we mapped each case onto its appropriate Internet channel conflict conflict management strategic domain. management style. In this success stories. study, the scheme was revised 1 For example, after answers marked by managers, a comto fit the Internet channel conflict domain, and named pany can identify its summation of theconflict management all topthrough calculating Internet channel style the Internet channel conflict measurement (ICCM) basic statistics such difference of mean (i) and standard deviations ( ) of each style using the analysis of variance (ANOVA) technique. instrument (see Table 1). 2There are special Web sites that provide success stories of Internet conflict manageAfter all top managers responsible for Internet ment (for example, digitalenterprise.org/channels/channel.html).
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Intermediary support strategy is used by manufac- Automotive allows its wholesale customers, but not turers with low concern for self but high concern for repair shops, to place orders through its Web sites. intermediaries. In this situation, manufacturers adopt Using the product differentiation strategy involves a passive Internet channel strategy, and use their Web selling different products through different channels. sites to support existing intermediaries. For example, Kendall-Jackson, a wine producer, initiated online a manufacturer may develop e-business infrastructure wine sales to 13 states. To avoid channel conflict, for its intermediaries, advertise Kendall-Jackson sold Artiproduct information instead of sans & Estates, a rarely Manufacturer's Concern for Self product sales, and give e-cuscarried wine, on its Web LOW HIGH Intermediary Support Differentiation tomers the location of the nearest site, while distributing Strategy Strategy Market Differentiation local intermediaries. Jeans comother wines through existHIGH Product Differentiation I Compromising II pany Levi Strauss developed its Manufacturer's ing intermediaries. SimiStrategy V Concern for Information Sharing Web site as an advertising center. Intermediary larly, Acer Group sells III Profit Sharing IV Rather than sell its brands online, only bundled products on LOW Conflict Avoidance Channel Absorption Levi Strauss uses its Web site to its Web site, and Sega sells Strategy Strategy provide information about its game bundles unavailable brands and products. The site also provides location Figure 2. Internet channel from intermediaries to avoid and contact information for the nearest department conflict management channel conflicts. Finally, strategy. stores and retailers that sell Levis. Using a similar stratGap Inc. has developed egy, H.E. Butt Grocery Company provides customers maternity clothing lines for exclusive sale on the with a list of retailers and their locations on its Web Internet. site, instead of selling products directly online. Wes & Conflict avoidance strategy is used by manufacturers Willy, a boys casual clothing company, provides the with low concern for self and others. Such manufacnearest store information with a turers engage in online Manufacturer's Concern for Self variety of resources for children. selling directly, while LOW HIGH Finally, Colgate-Palmolive redesimultaneously attemptIntermediary Support Differentiation Strategy Strategy Xerox fined its e-business site as an oral ing to alleviate intermedi Levi Strauss Texas Instruments H.E. Butt Grocery Co. Sega health information provider. aries concerns. These HIGH Wes & Willy Tenneco Automotive Colgate Palmolive Co. Kendall-Jackson Acer Group Through oral hygiene FAQs, and manufacturers are sucI Compromising Gap Musical II Gibson Strategy information in the form of Den- Manufacturer's cessful in sneaking into 3M Concern for V VF Corp. tal Professional World and Kids Intermediary direct Internet channel III Wes & Willy Dell Computer Corp. Compaq IV World, it introduces its product sales, but only by making Estee Lauder Gateway Inc. General Motors Nike groups, but does not sell any some sacrifices. When LOW 3M products on its Web site. Estee Lauder started Conflict Avoidance Channel Absorption Strategy Strategy Differentiation strategy is used Clinique.com to sell its in situations in which manufaccosmetics online, it develturers have high concern both for self and their inter- Figure 3. Success stories oped several strategies to mediaries. Such manufacturers seek ways to mapped onto their reduce conflicts with physical Internet channel conflict differentiate themselves from their intermediaries. To management strategies. stores. For instance, its Web do this, they utilize strategies such as market and site advertises gift availability product differentiation to minimize the cannibaliza- at bricks-and-mortar stores, or recommends the tion of existing channels. pretrial of its products at department stores before Using the market differentiation strategy involves purchasing them online. Through these efforts to separating customers into groups, and addressing maintain the trust of its retailers, Estee Lauder draeach group using different channels. For example, matically reduces adverse reactions from intermediXerox sells copy machines to its small and home office aries. General Motors also applied the avoidance (SOHO), and retail markets using online direct chan- strategy. By including lists of dealers and their home nels, while also selling machines to the industrial sec- pages on its Web site, it gives e-buyers the channel tor through regional retailers. Texas Instruments uses choice between the company itself and its dealers. the Internet to sell low-volume high-priced semicon- The e-buyer can then buy cars from GMs Web site ductors to large customers such as Sun Microsystems, directly or from the dealers listed on the GM Web while relying on distributors like Arrow and Hamil- site. Similarly, 3M started its online direct sales with ton-Hallmark to sell high-volume, low-priced prod- an extended joint Web site, which included retailers ucts such as memory chips. Similarly, Tenneco such as Office Depot, Office Max, and Staples.
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CHANNEL POWER, THE ABILITY TO CONTROL THE DECISION

VARIABLES OF THE MARKETING STRATEGIES OF CHANNEL MEMBERS AT DIFFERENT DISTRIBUTION LEVELS, IS THE MOST FREQUENTLY RECOGNIZED CAUSATIVE FACTOR OF CHANNEL CONFLICTS.
Channel absorption strategy, which is the reverse of the intermediary support strategy, is used by manufacturers with a high concern for themselves and a low concern for intermediaries. Such manufacturers adopt an aggressive strategy and push intermediaries to accept their decisions. In some cases, manufacturers sever relationships with previous intermediaries and sell their products exclusively on the Internet. In other cases, they aggressively merge their previous intermediaries into their company to remove the channel conflict. Dell employed the channel absorption strategy when initiating its pioneering direct online sales. Relinquishing the benefits of its previous bricks-and-mortar intermediary channels, it sold all its products on the Internet. Using the same strategy, Gateway severed its relationship with its previous intermediaries, and began basing its business only on direct Internet sales. Nike took this strategy a step further by making a contract with Fogdog to sell its products on Fogdogs Web site. As compensation for granting this online sales opportunity to Fogdog.com, Nike got a 12% stake in Fogdog, even though it still sells its products through its own Web site, and through traditional retailers. Compromising strategy. This dimension involves use of a give-and-take strategy; that is, manufacturers launch online sales, but also pursue mutual benefits through sharing market and consumer information, and sharing the benefits generated by direct sales with intermediaries. Two types of compromising strategies exist: information sharing-strategy and profit-sharing strategy. The information-sharing strategy involves sharing information collected through online sales between manufacturers and intermediaries. For example, 3M launched a joint Web site with U.S. Office Products (USOP), the fourth largest online retailer. 3M has 600,000 customer email addresses while USOP has 800,000. Instead of competing with each other, they share their customers on the same Web site and exchange customer information. Employing a similar strategy, VF Corp., the maker of Wrangler, Healthtex, and Jantzen Swimware, exchanges customer data, such as buying habits, with its intermediaries. This strategy enables VF Corp. to gain more information about customer needs and preferences, while maintaining a trust relationship with retailers [4]. Manufacturers that employ the profit-sharing strategy share profits derived from online sales with intermediaries. For instance, Wes & Willy developed its Web site to share profits with its retailers. When a retailer orders an out-of-stock item on its Web site, Wes & Willy sends the item directly to customers, but shares profits from the order with retailers. Similarly, Compaq gives intermediaries a 6% agents fee when current clients of intermediaries purchase products on Compaqs Web site.

Stage III. Considering Other Channel Factors Before making their final choice of channel conflict management strategy, managers should pay special attention to other channel-related factors such as channel power, dependency, environment, and product characteristics. Channel power, the ability to control the decision variables of the marketing strategies of channel members at different distribution levels, is the most frequently recognized causative factor of channel conflicts. Manufacturers should consider their relative channel power, and the possibility of retaliation by bricks-and-mortar distributors before deploying an Internet channel. When a manufacturer holds a powerful channel position, it may have more concern for self, and may therefore choose more self-oriented Internet channel conflict management strategies, such as the differentiation strategy and the channel absorption strategy. Channel dependency has three components: the relative size of a businesss contribution to profits; the commitment of one channel member to another member in terms of the relative importance of the latters marketing policies; and the difficulty in effort and cost faced by a channel member in attempting to replace another member as a supply source or as a customer. High channel dependency is known to promote trust and commitment between channel members because of their shared interests. Contrary to channel power, channel dependency positively affects manufacturers concern for intermediaries [2].
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IT IS CLEAR THAT FIRMS MUST INVENT A NEW CHANNEL

STRATEGY TO EXPLOIT [INTERNET] OPPORTUNITY, WHILE MINIMIZING CHANNEL CONFLICT PROBLEMS WITH THEIR EXISTING INTERMEDIARIES.
Channel environment is characterized by specific market situations, the existence of consumer groups, and channel-related laws. For example, if competitors in the same market adopt an Internet channel and are successful, manufacturers will often choose an aggressive strategy focused on their own concerns. The existence of consumer groups monitoring products can also affect the strategy selection. For instance, a consumer protection group can protest the online sales of grocery products through a site such as www.grocerygateway.com, since monitoring the quality of grocery products purchased online is difficult. Further, channel-related laws can affect strategy choices. For example, wine Web sites such as www.wine.com cannot sell their products over some state lines through the Internet, since each state has different liquor laws. Product characteristics are those characteristics that determine a products ability to be sold online. Some products are easily adapted to the e-commerce environment based on their characteristics. For instance, a product with high standardability and deliverability, such as a computer or an audio CD, can easily be sold via the Internet. Manufacturers tend to have confidence in products with features well suited to online selling, and therefore tend to apply a more self-concerned strategy. Dell is a good example of a company that selected the strongest self-oriented Internet strategy. It gave up its previous bricks-and-mortar channel based on the strategic judgment that its products have appropriate characteristics for Internet sales.

Conclusion Companies are still in the initial stages of entering Internet sales channels, focusing most of their efforts on signaling to the market that they are Web-savvy companies. Only a few innovative companies have taken this strategic opportunity and turned it into a success. Whether or not management thinks Internet channels will replace current bricks-and-mortar channels, it is clear that firms must invent a new channel strategy to exploit this new opportunity, while minimizing channel conflict problems with their existing intermediaries [9]. To this end, this article has proposed practical guidelines for Internet channel conflict management. By suggesting measurement scales for channel conflict management styles, possible alternative channel conflict management strategies, and other important channel factors, we hope to help companies select the appropriate strategy. c References
1. Bucklin, C.B., Thomas-Graham, P.A., and Webster, E.A. Channel conflict: when is it dangerous? McKinsey Q. 3 (1997), 3643. 2. Frazier, G.L. Organizing and managing channels of distribution, Journal of the Academy of Marketing Science 27, 2 (1999), 226240. 3. Ghosh, S. Making business sense of the Internet. Harvard Business Review (1998), 127135. 4. Gilbert, A. and Bacheldor, B. The big squeeze. Informationweek (Mar. 27, 2000), 4656. 5. Leda, S. Internet channel conflicts. Stores (Dec. 1999), 2428. 6. Maruca, R.F. Retailing: confronting the challenges that face bricksand-mortar stores. Harvard Business Review 77 (1999), 159168. 7. Rahim, M.A. Managing Conflict in Organizations, 3E, Quorum Books. Westport, CT, 2000. 8. Rahim, M.A. Rahim Organizational Conflict Inventory-II. Consulting Psychologists Press, Palo Alto, CA, 1983. 9. Shaffer, G., and Zettelmeyer, F. The Internet as a medium for marketing communications: channel conflict over the provision of information. MIT Working Paper E-Commerce Forum (1999). 10. Wilson, R. Manufacturers dilemma: to sell or not to sell directly. Web Commerce Today (May 15, 1998).

Stage IV. Making a Final Strategic Choice At this stage, managers should make their final choice of Internet channel conflict management strategy through the consideration of their channel Younghwa Lee (leey@colorado.edu) is a Ph.D. candidate, Systems conflict management environment and other chan- Division, University of Colorado at Boulder, CO. Zoonky Lee (zlee@unlnotes.unl.edu) is an assistant professor, nel factors. Companies do not need to select only Department of Management, University of Nebraska-Lincoln, Lincoln, NE. one strategy. After considering their organizational Kai R.T. Larsen (kai.larsen@colorado.edu) is an assistant resource capabilities, and the costs and benefits of professor, Information Systems Division, University of Colorado at multiple channel conflict management strategies, Boulder, CO. companies can select and combine multiple strate- Permission to make digital or hard copies of all or part of this work for personal or classor gies for a unique competitive advantage. For exam- room use is granted without fee provided that copies are not made fulldistributed for profit or commercial advantage and that copies bear this notice and the citation on the first ple, 3M utilized the channel avoidance and page. To copy otherwise, to republish, to post on servers or to redistribute to lists, requires compromising strategies, while Wes & Willy applied prior specific permission and/or a fee. intermediary support and compromising strategies. 2003 ACM 0002-0782/03/0700 $5.00
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